Puerto Rico Doesn’t Want Congress’s Bailout Plan

Puerto Rico might have no choice but to accept what once was unacceptable.

Republicans have come up with a plan to help Puerto Rico manage $70 billion in debt it can’t pay. It’s not the scheme that Puerto Rico Gov. Alejandro García Padilla wants.

A bill being drafted by the House Committee on Natural Resources, expected to be introduced next week, would grant the island authority to restructure its debts. It also creates an oversight board to oversee the process, and, in some cases, Puerto Rico’s finances.

This is something Padilla and other Puerto Rican officials have said is unacceptable. They view the oversight board as U.S. infringement on local autonomy. Instead, they want Congress to allow Puerto Rico to file for something similar to Chapter 9 bankruptcy protection, a process the U.S. commonwealth is not eligible for because it’s not a municipality.

The House bill, which came after negotiations with the Treasury Department and House Democrats, would also force creditors to accept a restructuring deal. This could be unpopular on Wall Street, where Puerto Rican municipal bonds initially were popular because they were free from federal tax.

Two insurers of Puerto Rican debt — Assured Guaranty and Ambac Financial — sued the commonwealth after it defaulted Jan. 4 on a $36 million debt payment. The two companies asked a judge to declare that Puerto Rico violated the U.S. Constitution when it diverted $163 million from revenue meant to pay down debt within the territory’s highway, infrastructure, and other public agencies. Theinsurers also want to prevent Puerto Rico from doing the same in the future.

But Padilla, and Wall Street, might have no choice than to accept Congress’s terms. Earlier this month, Padilla said that without financial help, his government would not be able to deal with the Zika virus, because it did not have the cash to eliminate standing pools of water or other places where mosquitoes thrive. Bites from the bug transmit the virus, which has been linked to birth defects, and the CDC estimates 20 percent of Puerto Ricans living on the island could contract it.

And economic conditions there show no sign of improving, so chances that the government could eventually come up with the money it owes are slim. Puerto Rico faces a trifecta of challenges: Its government has spent irresponsibly for years; for five of the last six, it has failed to pass a balanced budget, a constitutional requirement. Its GDP hasn’t grown since 2005, floating in negative territory ever since.

And its population is shrinking, fast. According to a Pew report released Thursday, its population is 3.47 million in 2015, down 334,000 from 2000, or a 9 percent drop. Seventy-five percent of this loss has occurred since 2010. This continues the the largest emigration in more than 50 years, Pew found.

Padilla has been resolute in his opposition to U.S. supervision of Puerto Rico’s finances. But now, faced with both a public health and fiscal crisis, it might be the only way to save the island he governs.

Photo credit: SPENCER PLATT/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis